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Accounting Concepts That Shape The Financial World

Accounting ConceptsAccounting Concepts

Accounting is an enormous and complicated industry. Although it has thousands of rules, there are some fundamentals that form the very core of accounting. Understanding these concepts will not suddenly make someone an accountant, but it is helpful for people who are interested in accounting or plan to pursue accounting studies.

Consistency

Every accountant has to learn how to be consistent. When a certain method is applied, the same method will need to be used for the rest of that period. An accountant cannot use the single-entry method one month and switch to double-entry the next month. Without consistency, it would be impossible to accurately compare information.

Ethics

Accountants are the most trusted employees in a company. It is there job to report accumulated costs, revenues, and whether there was money left over. An accountant who does not state the truth on their reports can face severe repercussions and will probably not be able to find another accounting job in the future. In some cases, accountants have been fined millions of dollars and faced imprisonment for understating expenses, overstating revenues, or misusing company funds.

Diligence

Even the best accountants make mistakes in their calculations. This is why it is so important for accountants to check and re-check the accuracy of their reports. Errors in a report severely affect the company, so extreme diligence is necessary.

GAAP vs. IFRS

GAAP is a US-origin accounting concept system that was popularly used in the past. However, most of the world has now switched to IFRS, which uses market value for assets instead of book value. Even for a US-based business, learning both IFRS and GAAP is beneficial since it allows an accountant to operate in any part of the world.

Overstate Costs and Understate Profits

An accountant is not always able to make his/her equations exactly right. When in doubt, it is always better to overstate costs and understate profits. This way, a company can be pleasantly surprised that they have extra money instead of surprised that their debts/costs are much higher.

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